Regulating rapidly developing artificial intelligence (AI) technologies in the finance sector remains one of the topmost priorities for regulatory bodies globally. Unfortunately, despite the well-intentioned push for policy development in this realm, it’s increasingly evident that the Security and Exchange Commission’s (SEC) 2023 proposal is already lagging behind the lightning-fast progress of AI. A stark critique of these proposed regulations comes from Brian Daly at Akin, who has highlighted several worrying elements in the planned measures.
The SEC aims to ensure financial market supervision evolves with technological advancements. To that end, it plans to introduce a rule regulating how investment advisers and broker-dealers might employ AI technologies. While this move is wrapped in consumer protection ethos, Daly stresses that adopting the proposal titled ‘Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker Dealers and Investment Advisers’ might impose retroactive liability on players in the financial market. Coupling this with subjectively implemented guidelines, the proposal risks hampering the implementation of leading-edge technology in the industry.
This proposal’s potential perils prompted bipartisan attention in Congress, leading senators Ted Cruz and Bill Hagerty to introduce legislation aspiring to prevent the proposal’s implementation.
Daly outlined the proposal’s structure, which he described as a ‘bureaucratic land grab’. Essentially, limitations of this proposed regulation include an overly broad technological coverage encompassing everything from advanced machine learning tools to basic Excel spreadsheet functionalities. Moreover, it places an untenable obligation on advisers to track all uses of the covered technology; an immense task requiring substantial resources.
Despite the nuances of AI-driven technology, the proposal imposes a non-objective requirement on advisers and brokers to ‘eliminate’ any identified conflicts—an unprecedented standard that overrides longstanding precedents. According to Daly, the proposal’s implications are already proving outdated due to the swift pace of AI technology’s progress.
Finally, Daly contrasts the SEC’s approach with that of the Commodity Futures Trading Commission (CFTC), which demonstrates a more curious and humble approach in its request for industry-wide comments on AI use in regulated markets. This contrast underscores the critical lesson for the SEC: the need to understand the changing terrain of AI technology and learn from the current and future industry applications before enforcing outmoded regulations.
Read Daly’s full analysis on the SEC’s plans and their implications in his article here.